Innovations: widening the lens

Apr 14, 2016

Speech given by Maarten Wetselaar, Integrated Gas Director at Shell, in Perth, Australia, on April 14, 2016.

Maarten Wetselaar argues that the LNG industry will only fulfil its long-term potential by coming together to ensure the competiveness of gas and bring down its cost. He says that the industry also needs to call on governments to recognise the benefits of gas through the policies they make.

Ladies and Gentlemen, good morning.

With Australia’s LNG exports expected to jump from 25 mtpa in 2014 to 78 mtpa by 2019, I can think of no better country for this conference to take place in.

Game changers. I take this to mean innovations of one form or another. This is an important topic for one fundamental reason: the LNG industry will only fulfil its long-term potential through a concerted and consistent focus on innovation.

To make sure that happens, a lot of attention rightly goes into technological innovation. But today that’s not what I want to focus on. Instead I’ll talk about cost innovation and policy innovation.

Costs

With Shell’s annual Safety Day taking place yesterday, I’m especially mindful that cost innovation is for nothing unless everyone working in our industry is safe. Lowering costs does not mean compromising on safety. Management, the workforce and the regulators need to work together.

Costs need to come down to reassure policy makers and customers that gas is a competitive choice with all other energy sources, as well as being a responsible choice from an environmental perspective.

Cost innovation must be looked at by the whole supply chain, from engineering contractors to suppliers. That’s why conferences like this are such a great opportunity to have conversations with counterparts.

There’s too much myopic thinking. Just because things have been done in a certain way, it doesn’t mean the same approach should continue.

So share bold and creative ideas. Be curious. Ask questions. Think of innovative new ways to do business. And don’t let ideas fizzle out.

Within your own company, overcome challenges by bringing together teams who don’t normally work together.

Let me give you examples from my own back yard.

Engineers at Shell have been looking into reducing the cost of LNG re-fuelling sites for road transport in the US and Europe. So we brought together LNG engineers and retail engineers with customers and engine manufacturers.

Pooling their thinking led to us slashing in half the cost of an LNG re-fuelling site. They developed effective ways to manage boil-off gas and pressure at various stages of the supply chain. They also implemented creative methods for safely reducing the plot size of the sites, thereby saving costs. This kind of collaboration – which helps competitive and cost effective ways of doing business develop – should be the rule, not the exception.

Another team at Shell has been working on a potential small-scale LNG project in Gibraltar. They identified ways to optimise both the technical and commercial aspects of the project across the value chain, and through valuable insights from Gasnor – a Shell subsidiary in Norway which provides LNG fuel for ships and industrial customers. This led them to developing a new approach at a cost of less than a third of the original estimates.

Through these, and other cost innovations, we are able to open up new markets for LNG.

With cost innovation, we don’t need to hold out for a once-in-a-generation idea. A big impact will be achieved through incremental improvements in efficiency, minimising bureaucracy, and keeping the conversation going. As the adage goes: how do you save a million dollars? By saving a thousand dollars a thousand times.

Policies

Now on to innovative policies.

One policy that will have a big impact on our industry is a government-led carbon price. Not only will it lead to the development of technologies that can bring about widespread and permanent reductions in emissions. It will also encourage the switch from coal to natural gas to generate electricity. Ultimately, it’s about looking at the full cost of energy – from environmental to economic factors.

The UK is one of the countries supportive of carbon pricing, going so far as to implement a carbon price floor in 2015. This is just one example of the political and legislative commitment to tackle climate change to come out of the UK in recent years.

Such interventions, when combined with lower price levels, are having an impact – in the first two months of 2016, gas demand in the UK power sector increased 40% compared with 2015.

The Climate Change Act includes a target to reduce emissions by 80% in 2050. To keep the country on track, a system of carbon budgets has been introduced. These budgets restrict how much carbon the country can produce and emit every five years, and provide long-term visibility for investors.

In addition, the government has introduced in law an emissions performance standard for any new power station built in the UK.

These developments have effectively called time on coal in the UK.

China

Other countries have adopted many game-changing policies which are having a positive impact, when it comes to the wellbeing of our industry, and the wellbeing of the planet.

Let’s look at China, where policies have come about not only in response to the global effort to cut carbon dioxide emissions, but also in reaction to the urgent need to improve air quality in major cities. In 2012, air pollution from coal caused around 670,000 deaths in China, according to a study by Tsinghua and Peking University.

Policies cover everything from promoting the role of gas in meeting peak demand for power to encouraging the use of gas-fired combined heat and power plants to replace small and inefficient coal-fired units.

As with costs, it doesn’t need to be about the one huge innovative policy. A number of small policies – even at the city level – could add up to a big difference.

The final point to flag when it comes to gas and LNG-related policies is that it’s not just about power generation. Policy decisions are also important when it comes to increasing demand in other sectors, such as transport.

For example, one cruise liner with 7,000 to 8,000 people on board can use the same amount of fuel as a small city with a population of around 30,000. These ships are essentially floating power stations. So policies to reduce marine emissions will make LNG an attractive fuel for shipping, potentially opening up major new markets for our industry.

Carnival is one of the companies which has already signed up to buy LNG from Shell for in-port power consumption for the AIDAprima cruise vessel.

Conclusion

Time to draw to a close.

In today’s debate over what the next game changer is, I’ve argued the importance of cost and policy innovations.

But let’s not lose sight of the ‘game-changing’ innovation staring us all in the face – LNG itself.

Our industry mustn’t be shy about the key role this source of energy should play in the global energy transition.

Over the past decade, gas has played an increasingly significant role in meeting global demand for energy and addressing energy poverty. We must ensure this trend continues. That’s the best way of meeting future demand growth with less impact on the environment.

With LNG you don’t need pipes connecting supply to demand. LNG’s flexibility is why it has a bright future.

As I tell my team every day, we are part of an amazing moment in time. We’ve got the chance to grow the use of gas in the world. To help more people achieve economic prosperity. And to ensure they breathe cleaner air.

For gas to achieve its full potential in powering progress in people’s lives and to play a key role in the energy mix, our industry needs to come together to ensure the competitiveness of gas and bring down its cost. And we need to call on governments to recognise the benefits of gas through the policies they make.